Have you been fooled by any of these revocable living trust urban legends?  Below, we set the record straight.  If you hear of any other living trust “facts” that you suspect might be an urban legend, consult with a qualified estate planning attorney.

URBAN LEGEND 1.  Revocable Living Trusts Protect Your Assets from the Nursing Home

TRUTH 1.  If it’s your revocable living trust, your assets are NOT protected from the nursing home or any other creditor.  You need comprehensive insurance coverage and additional estate planning to protect you from the nursing home.

However, if you pass assets from your living trust (or your own name) to trust shares for someone else such as a spouse, child or parent, the trust assets are protected from their creditors such as a nursing home, divorcing spouse, or bankruptcy creditor.

There is another kind of trust, an income only trust, which is used to protect your assets from the nursing home.  Your own living trust does NOT offer you asset protection for your own trust assets.

URBAN LEGEND 2.  Revocable Living Trusts Always Avoid Probate

TRUTH 2.  Your revocable living trust only avoids probate for those assets that are funded into the trust.  If you die with any assets in your individual name, probate is guaranteed.

Funding means that all of your assets are titled into the name of your trust except for retirement and qualified annuities.  Changing the title of these assets accelerates all of the income tax and that’s a BAD thing.

Instead, name your trust as the beneficiary of your retirement plans and qualified annuities.  Your trust should be the beneficiary of your life insurance and other annuities as well.

Please refer to part two of this article, 4 Common Revocable Living Trust Urban Legends, to learn about two more revocable living trust urban legends.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

Trust funding avoids probate, prepares for incapacity, allows your successor trustees to manage your trust assets and helps to ensure that your estate plan works.  Your retirement plan should be funded.

Funding in relation to retirement plan assets means that you change the designated beneficiary from an individual (such as your spouse) to the name of your revocable living trust.  You absolutely do NOT change the title of the retirement account to anything, including your trust.  Changing the title on qualified assets such as retirement plans and qualified annuities accelerates all of the income tax.  Accelerating income tax is really bad, whereas tax deferred growth, as you get within a qualified plan, is really good.

A side note:  If you are married and want to change the beneficiary of your retirement plan to your trust, and not make it be your spouse, your spouse will have to sign a waiver indicating that he or she is aware of the beneficiary change and is okay with it.  If you don’t obtain the waiver, your spouse will be deemed the beneficiary regardless of your wishes.

Once you have your retirement plan funded by changing the beneficiary designation to your trust, jot down a list of all of your other assets.  Be sure that your trust is the beneficiary of annuities and life insurance, and make sure your trust is the account owner of all your other assets.  Other assets include your house, car, bank accounts, investment accounts, and personal property such as collectibles, antiques, jewelry and other valuables.

Note that some states do not allow cars to be funded.  Some states have tenancy by the entireties home ownership, with corresponding asset protection for married couples.  Ask your estate planning attorney if you are in one of these states and for specific advice on trust funding.

If you have a retirement plan, be sure to fund it by naming your trust as the beneficiary of the account.  If you have any questions about retirement plans or trust funding, consult with a qualified estate planning attorney.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

If you have a revocable living trust, you (and your spouse, if you have one) are most likely trustee of your own trust.  There may also be contingent trustees named to serve in your place should you become disabled and upon your death.  They are often called “disability trustees” and “death” or “settlement trustees.”  They step into your shoes and run your trust when you cannot.

Follow Trust Instructions

The most important duty your trustees have is to follow your trust’s instructions.  Your trustees are only authorized to act in a particular matter if they can find authorization in the trust document, or under state law.

Examples of Trustee Duties

Trustee duties are outlined in your trust.  Typical duties include protecting and managing assets, paying bills, dealing with financial institutions and creditors, providing for your care if you are incapacitated, paying taxes, and distributing assets to named beneficiaries.

What Does My Trustee Need to Know?

Your trustees must have access to the trust document and will most likely work with a qualified estate planning attorney who will guide them.  Your trustees should read the document and get good advice.  It’s also important that your trustees always act in your highest and best interests; keep your assets separate from their own; keep good financial records of all investments, expenditures, and income; and never use assets as their own, unless the trust documents authorizes such.

Be sure that your trustees have access to your trust document and know how to contact your estate planning attorney. 

Choosing a Trustee

Choose trustees who care about you; are good with money and investments; can work with professionals such as your estate planning attorney, financial advisor, and CPA; can communicate effectively with your beneficiaries; keep detailed records; and stay organized.

When you have a particular trustee in mind, speak with that person to get permission before naming him or her as trustee.  Your first choice may have too much on his or her plate and may not want to take on added responsibility.  In addition, be sure to name contingent trustees (and get their permission) in case your primary trustee is unable or unwilling to serve.

If you need more information on trustee duties or choosing trustees, consult with a qualified estate planning attorney.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

A revocable living trust is a popular estate planning tool because it offers many benefits.  If you’re thinking about using this planning tool, take a look at the following information to learn about a revocable living trust.  If you have any questions, or if you’d like to create a trust, contact an estate planning attorney.

• You can avoid probate.  Avoiding probate saves time and money and keeps your affairs private.  Your revocable living trust must be fully funded for probate avoidance.  This means that all of your assets that would otherwise go through probate must be titled in the name of your trust (not your individual name.)
• You can control your trust during your lifetime.  Having full control makes it possible for you to make changes to your trust document as needed,as long as you have the requisite legal capacity to sign legal documents.  In addition, you maintain full control of all of your assets.
• You have the ability to prepare for incapacity.  With a revocable living trust, you can decide who will manage your trust’s assets should you become incapacitated.  This makes it possible for your financial affairs to always be in order.
• Your beneficiaries can receive their inheritances more quickly.  Since assets won’t pass through probate, beneficiaries won’t likely have to wait a long period of time for their inheritances.
• Your trust can be used during your lifetime and after your death.  Unlike a will, a trust is effective immediately.
• It’s hard to contest your trust.  Many people create a revocable living trust to ensure that their wishes are respected.  Will contests are much more likely successful than trust contests.

Work with an attorney to ensure that your revocable living trust’s affairs are in order and you take advantage of these benefits.  If you’re ready to create a revocable living trust, consult with a qualified estate planning attorney.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

A trust is a powerful estate planning tool, and there is more than one way to create a trust, including…

Totten Trusts

When you wish to create a simplistic trust with a relatively small amount of cash, some people choose to create a Totten Trust.  This type of trust is also referred to as a Payable on Death, or POD, account. A Totten Trust is a relatively simple arrangement since there is no detailed trust agreement, but rather a simple form provided by many financial institutions that allows you to name a beneficiary to receive the funds in the event of your death. The depositor keeps total control over the funds until his or her death.  Upon his or her death, the named beneficiary can be paid the funds when they present the death certificate to the institution.

Uniform Transfers to Minors Act

If you need to create a trust to manage money for minors, and if the amount involved is small, you may also set up a bank account under the Uniform Transfers to Minors Act (UTMA.) This law allows you to hold a bank account in the name of a minor, with an adult named as the custodian of the account. The minor child would receive the funds when he or she reaches a certain age, which varies by state, and can be as young as 18 years old in a few states, to as late as 25 years old in other states.  Until the time of final distribution, the custodian is able to use this money for the minor’s needs.  Again, this is a simplistic tool that can be helpful in some cases, such as when your minor child inherits money from a grandparent.

Trust Attorneys

The most effective way to create a trust is to work with a trust attorney or estate planning attorney to determine the type of trust best suited for your needs.  The attorney will draft a trust agreement specifically tailored to meet your family’s goals.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

We certainly hope that our loved ones will accept our final wishes, but unfortunately, disagreements and old hurts can make an appearance during such an emotional time.  When someone is left out of a will, or feels they did not receive their fair share of an estate, they may contest the will based on one or more of the following:

• The testator, the person who had the will created, lacked the capacity to make a will.
• Another person had undue influence over the testator.
• There was fraud involved before, during or after the will was created.
• There was a mistake in the will – for example, another child was born after the will was drafted.

Who can file a will contest?  Generally, anyone who has a legitimate financial interest in the estate can challenge the will. The person’s financial interest must be considered to be more than speculative. In other words, you cannot contest a will if you were friends with the deceased and think he or she should have left you something. However, if you were not left anything in the will, but would be entitled to something under the state intestacy laws as an heir, then you would be in a position to challenge the will.  Why?  Consider what would happen if you were to win the will contest, the will would be found invalid and the estate would be distributed according to the laws of intestacy to the heirs.  If you would not receive a share under these laws, what would be the point of filing a will contest?

Proper estate planning can help reduce the chances of a will contest, and there are tools an estate planning attorney can use should you worry about a loved one challenging your will.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

Many people choose to include a revocable living trust in their estate plan.  A trust is a powerful estate planning tool with a number of benefits.  However, you may have concerns about whether you will lose control over your assets when utilizing this planning device. You won’t.  Take a look at the following information, to learn more about a revocable living trust.  If you have any questions about the use of a revocable living trust, contact an estate planning attorney.

A Revocable Living Trust Helps You to Maintain Control

When you create a revocable living trust, you’re in full control!  You can decide what instructions to include in your trust, who will be given your assets, and who will help handle your trust’s affairs during any period of incapacity and after your death.  You’re also able to make changes to your trust during your lifetime, as long as you have legal capacity.  Thus, you will not lose control over your assets.

Only Irrevocable Trusts are a Loss of Control, not Revocable Trusts

While an irrevocable trust’s terms can’t technically be adjusted once it’s created, you can always make changes to a revocable living trust, as needed.

Be Sure to Fund Your Revocable Living Trust

In order to take advantage of the many benefits of a revocable living trust, you will need to correctly re-title your assets in the name of your trust.  It’s important to work with an attorney to ensure all of your affairs are handled correctly.  This will also allow you to take advantage of all of the benefits of a revocable living trust, including probate avoidance.

If you’d like to have full control over your assets and decide how these assets will be used during incapacity and distributed after your death, consider creating a revocable living trust.  If you have any questions, consult with a qualified estate planning attorney.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

While designing your estate plan, you will need to select successor trustees of your revocable living trust.  Successor trustees step in and act during any period of incapacity and after your death.  By choosing successor trustees yourself and outlining instructions in your revocable living trust, you maintain control and your wishes will be followed.  All of this means that your estate plan works.

• Choose trustees who care about you and are willing to dedicate the time necessary to the task, want to serve, and are financially savvy, willing to ask for professional help, and good record keepers.
• Always ask permission before naming someone.  You may think that a loved one is ideal for the role, but he may be feeling completely overwhelmed with his own responsibilities at the time.
• Always name contingent trustees to serve if your primary trustee is unable or unwilling to serve.  This prevents a gap in authority as well as preventing the court’s interference in your finances and family.
• Don’t feel obligated to choose a spouse or a child if it’s not a good fit.  However, if you don’t, definitely talk over your decision with your family so questions can be answered and much anger and resentment can be averted.
• Don’t name all three of your children at once.  Legally, you certainly can name all three kids, but, in practicality, it is cumbersome to carry out the duties of trustee with three trustees.
• There are professional trustees available if none of your loved ones are a good fit.  Banks, trust companies, and CPAs commonly serve as professional trustees.  Consider giving your beneficiaries the power to fire a trustee and hire another one because corporate fiduciaries (i.e. banks and trust companies) can be challenging to work with.

If you need additional guidance regarding the selection of successor trustees for your revocable living trust, consult with a qualified estate planning attorney.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

Revocable living trusts have many benefits.  In fact, most estate planning attorneys consider themselves to be trust based attorneys and love living trusts.  However, there are myths that are passed around the kitchen table that just aren’t true.

We’re here to set the record straight:

• Revocable living trusts do NOT protect assets from the nursing home.

While you can provide asset protection for assets you pass to your beneficiaries via your living trust, your assets are not protected.  You need good insurances and other means (such as Medicaid) to protect your assets.

• Settling up a revocable living trust does NOT mean all the work is done.

If you become disabled and when you die, your trusted helpers, called “trustees,” must take action and follow the instructions in your revocable living trust.  The trust is NOT a magic book.

• Your revocable living trust is NOT a once and done.

Your trust and your overall estate plan must be updated on a regular basis, every three to five years or upon the occurrence of a significant life event such as marriage, divorce, the arrival of a new child, or a move to a new state.

• Your revocable living trust does NOT avoid probate unless fully funded.

Just executing a trust does not guarantee probate avoidance.  Your trust must be fully funded to avoid probate.  This means that all of your assets must be funded into your trust.  In other words, all of your assets must be titled in the name of your trust to avoid probate.

• Revocable living trusts are only for rich people.

Actually, trusts are appropriate for most people.  So long as you aren’t trying to qualify for Medicaid to pay for a nursing home or aren’t otherwise destitute, it is likely that you would benefit from including a revocable living trust in your estate plan.

If you have questions about living trusts, be sure to consult with a qualified estate planning attorney.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.

There are lots of ways you can have your trust distribute money to your beneficiaries.

Here is a checklist of some of the jargon, considerations, and approaches involved in trust distribution. Too often people view these critical and personal decisions as mere “boilerplate”. Doing so may well jeopardize your intended goals for setting up a trust. You need to take the time, and think through the “what ifs” to make it work.

When preparing a trust agreement consider all aspects of distributions decisions. Who should make the decisions? Who are the trustees? Should you instead provide for a distribution committee to make these decisions? When and how should these decisions be made? Start with personal details, and then conform those decisions to meet tax law requirements for the particular trust. Here are some points to consider:

• Should there be any limits on the standards for distributions?
• Should different trustees have different standards by which they can make distributions? For example, an institutional co-trustee may be given an unlimited standard (“comfort and welfare”) while an individual trustee may be limited to maintaining a beneficiary’s lifestyle (“ascertainable standard”). You may view the institution as a stronger and more independent decision maker that will not be pressured by a beneficiary in the same way that a family member trustee might be.
• It’s common to limit distributions to the beneficiaries in the areas of health, education, maintenance and support (“HEMS) to what the tax law calls an “ascertainable standard”. This is loosely translated as maintaining the beneficiary’s “standard of living”.  Lots of people are comfortable with this standard for distribution, but what does it mean? What is a beneficiary’s standard of living? When should it be determined? When you sign the trust (or the will creating the trust)? After you die? After Junior starts spending that big insurance policy he collected after your death?
• How should the trustee balance distributions when there are multiple current beneficiaries of one trust? It is common to name the surviving spouse, and the children all as beneficiaries of a by pass trust (intended to safeguard the current $2 million federal exclusion, or often a lower state exclusion, from tax in the surviving spouse’s estate). Who should be favored, if anyone?
• How should the trustee balance distributions when there are current beneficiaries (e.g., your third spouse), and remainder beneficiaries (children of your first marriage) of one trust? Some guidance as to how the trustee should balance distribution decisions should be provided. Who, if anyone, should be favored ? In some cases a unitrust approach is advisable (e.g., pay 4% of the value of the trust each year to the spouse, the remainder on her death to the children). It’s reasonable and clear. But often it’s too simplistic and rigid to accomplish your goals. If so, you need to provide parameters.
• Who should be included in the definition of beneficiaries? If your children are named as beneficiaries of a trust, should their children also be included (although generation Skipping Transfer tax (GST issues) will have to be considered)?  How do you define grandchildren? Should adopted children be included? Should your children’s spouses be included? Partners?
• Should the other resources available to a beneficiary be considered? If grandma set up a trust to pay for you daughter’s lifestyle, should the trust you set up distribute what effectively will be a duplicative amount? Should a beneficiary be required to take out a reverse mortgage (or otherwise tap home equity) before the trust can pay out? If you mandate that support be considered, this could be a risk. If your spouse is a beneficiary of a by pass trust (not included in her estate) and the QTIP trust (marital trust taxed in her estate) mandates that distributions consider all resources, increasing the distributions from the by pass trust will effectively increase the tax on her death. Is that the intent?
• Must all beneficiaries of a trust be treated equally? Equal sounds simple and superficially “fair” but does nothing to account for changed circumstances, different needs, etc. If one child beneficiary has a major health issue, is equal distribution really appropriate?

Contact the Deborah Sexton Law Office at (479) 443-0062 or www.arkansas-estateplanning.com to get answers to questions you may have.  Deb offers free half-hour consultations.

This information in this article is brought to you by Martin M. Shenkman, CPA, PFS, MBA, JD, AEP® through The NAEPC Foundation.

Deborah Sexton Law Office, PA is a member of the American Academy of Estate Planning Attorneys.